Health-care stocks facing a judgment day

Supreme Court’s ruling on overhaul could take a bite out of shares

By

RussBritt

LOS ANGELES (MarketWatch) — For the last 27 months, the health-care industry has been operating under the assumption that everyone has to get insurance, and insurers have to accept everyone who wants it.

That all could be undone as early as Monday, when Supreme Court is expected to issue its rulings on the 2010 health-care overhaul measure. If the justices overturn any part of the law, expect significant portions of the health-care sector to be upended.

SPECIAL REPORT: the HEALTH-CARE DECISIONThree U.S. health firms plan to keep offering some
required benefits, even if the Supreme Court strikes down the entire law. (Photo: AP.)

The stocks of hospitals and insurers will be the hardest hit should the court ultimately decide that mandating U.S. citizens buy insurance is unconstitutional. Insurer stocks will feel acute pain if the court does that, but doesn’t take the extra step and strike down the requirement that they offer coverage to all.

But just about every facet of health care faces some uncertainty if any part of the law officially known as the Affordable Care Act is overturned.

“No one has an edge,” said Glenn Novarro, analyst for RBC Capital Markets.

The high court is expected to conclude its session at the end of the month, and court officials say that decisions will come down only when justices actually convene. The next meeting of the nine justices is scheduled for Monday, and another gathering is scheduled for Thursday.

After that, justices are expected to convene again on June 25, which could be the last meeting they’ll have for the current session. Court officials, however, won’t say what the justices’ schedule will be beyond this coming Thursday.

Any number of scenarios could come into play once the court makes its ruling on the polarizing law that is the centerpiece of President Barack Obama’s legislative achievements and sometimes given the name “Obamacare.” With any scenario, though, some change in the prices of various health-care stocks is likely — even if nothing changes, analysts say.

Striking down the individual mandate that requires the purchase of insurance could hurt the shares of such hospital stocks as HCA Holdings Inc.
HCA, +0.30%,
Tenet Healthcare Corp.
THC, -2.06%
and Health Management Associates Inc.
HMA

Hospitals have been under the requirement that they provide emergency care to all, regardless of ability to pay, and for decades they’ve had to record that “bad debt” on their books. The health-care overhaul, and the individual mandate in particular, offered the possibility for them to restore some order to the accounting process.

But a company like HCA, the biggest hospital operator in the nation, could end up benefiting, said Sheryl Skolnick, analyst for CRT Capital Group.

Skolnick says HCA’s high free-cash flow allows it flexibility, and it may see a buying opportunity if other hospitals aren’t able to function with an unfavorable court ruling.

“I think the hospital stocks would go down if the mandate goes away,” she said.

The court also is examining whether forcing states to expand Medicaid — also part of the overhaul — is legal. If that is overturned, other hospitals that are heavily reliant on Medicaid such as Community Health Systems Inc.
CYH, -2.38%
and Vanguard Health Systems Inc.
VHS
will feel the pain.

Cutting Medicaid back to pre-overhaul levels also will take a bite out of the shares of such insurers as Centene Corp.
CNC, +1.14%
, WellCare Health Plans Inc.
WCG, +0.58%
, Molina Healthcare Inc.
MOH, +0.90%
and Amerigroup Corp.
AGP, -0.80%

But all insurers will be hit hard if the court strikes down only the individual mandate but not the requirement that coverage be provided to all regardless of medical history. All the nation’s biggest carriers, including UnitedHealth Group Inc.
UNH, +2.00%
, WellPoint Inc.
WLP
, Aetna Inc.
AET, -2.38%
, Cigna Corp.
CI, +1.18%
and Humana Inc.
HUM, +2.35%
are expected to tumble should that occur, though UnitedHealth and WellPoint are large enough to absorb some shock.

“That would be the worst-case scenario,” said analyst Matthew Coffina of Morningstar Inc. of a surgical strike on the mandate only. “I think that’s relatively unlikely.”

Forcing insurers to cover high-risk patients without having low-risk policyholders to help pay for those costs is akin to sending carriers to the gallows, analysts say.

Even if the high court struck down only the individual mandate, Congress would be pressured to come up with remedies in order to keep insurance options out there and to keep premiums down, Coffina said.

Insurers still face uncertainty if they rule against both provisions. The carriers themselves say they have been operating as if the law will endure.

“[The Affordable Care Act] right now is the law of the land,” said Tyler Mason, spokesman for UnitedHealth. “We’re doing what we can to implement it.”

While it’s unlikely the court will strike down only the mandate, analysts caution an apple cart that has been built over the last two-plus years will be upset. It has started to fix some of the issues hanging over health care, says said Les Funtleyder, portfolio manager at Miller Tabak, who also has holdings in a number of health-care companies.

“Almost everybody is for this law in the industry,” Funtleyder said.

What investors may want to watch for, Funtleyder said, is a two-fold stock move. There could be a knee-jerk response in the markets in the days immediately following the court’s decision, then a longer-term trend.

The knee-jerk response could lead to a mispricing of assets, and investors might well end up jockeying for revised long or short positions as a result, Funtleyder said.

But if the law is struck down, don’t expect the issue to go away, because health care costs will continue to spiral out of control, he cautions.

“This is not the last we’ve heard of reform,” Funtleyder said. “If it’s not Obamacare, then the universe will force something upon us.”

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